Gravita's accounting and audit offering to the crypto sector

Accounting for Crypto

Cryptocurrency and cryptoassets are somewhat of a new phenomenon, especially when you consider the pillars of finance and accounting have been in place for centuries.

There is no specific reference to crypto in IFRS or UK GAAP, the two standards that the majority of UK accounts are produced under.

The treatment therefore of crypto is the subject of some debate. The accounting world has settled on four possibilities with intangible assets being the most likely.

Intangible assets 

The most likely treatment of crypto is an intangible asset. Crypto seems to fit the description of intangible assets as it is unlikely to be classified as cash, inventory or a financial asset. Both IFRS and UK GAAP seem to land on an intangible due to:

1. It being separately identifiable and has a value
2. It has no physical form
3. It is not a monetary asset
4. Economic benefits are generated from it

The entity would have a choice under FRS 102 to hold at cost or revaluation model.

Cash or currency 

Whilst industry insiders may argue that crypto will replace cash in the future, it is unlikely to be accounted for as cash.

The reasons for it being difficult to classify as cash are due to:

1. It is not legal tender backed by government or state
2. FRS 102 states that cash is not subject to insignificant risk of changes in value

The volatility of crypto in the past has meant that this treatment is unlikely, although this may change over time.

Inventory 

It could be argued that if crypto trading was the in the ordinary course of business that crypto could be classified as inventory.

In order to do so, the entity would have to demonstrate the active trading of crypto and not hold the asset for long term investment purposes, similar to that of a trader of securities and shares.

As with all inventory classifications, the asset would need to be held at lower of cost or net realisable value, which could lead to large fluctuations in the financial statements within volatile periods of crypto valuations.

Financial instruments / assets 

For a class of asset to be classed as such, then a contract gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

In most cases, there is likely to be a lack of contractual obligation along with the right to an asset and therefore it is unlikely to be classified as a financial instrument.

Auditing of crypto

The auditing of crypto within the UK is, like many other things with the technology, in its infancy.

Currently the holding or trading of crypto, or even running a crypto exchange does not fall under the UK regulatory requirements as may be expected.

Very few crypto corporates fall into the need for an audit unless statutory requirements are met or more commonly, a UK subsidiary falls into a larger group which requires it to be an audit.

The USA and Canada are more advanced in this field and their regulators are further along in the crypto journey.

The most difficult area to tackle from an audit perspective is the existence of the crypto asset. If we were to compare a crypto holding with a bank holding for example, it would be simple for the auditor to rely on third party confirmation from an institutionalised bank, due to the stringent controls and regulation around banks.

For a crypto holding with a digital exchange, it is far more difficult to rely on confirmation from the exchange due to the lack of said systems, controls and regulation. The existence of the crypto can only be verified by using sophisticated software, often designed by experts in auditing crypto.

What next?

For more information on Gravita’s audit and accounting offering to the Crypto sector, please contact Dan Howarth.